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Investors in
China weren’t making money last week. The reason: stock
markets were closed.
That’s
how easy it has become to ride China’s stock boom; if
the market is open, you can make money. It has long been
known mainland shares are driven more by momentum than
fundamentals—more Ponzi scheme than market. With each
passing day, though, things are becoming frothier and
more surreal.
Macau
can’t be happy. The island’s proliferating casino
business had designs on tapping a 1.3 billion-person
market of gambling enthusiasts. These days, the real
action isn’t at Macau’s baccarat tables, but in Shanghai
and Shenzhen.
What’s
happening in
China
is a transformation event. Rarely before, if ever, have
investors been able to make so much money so quickly
with so little knowledge of what they are buying. It’s
too late to call Chinese stocks a bubble, when Asia’s
No. 2 economy is experiencing a bubble in
bubbles—stocks, real estate, pollution, diplomatic
crisis from Sudan to Myanmar, you name it.
The plot
is thickening as Chinese euphoria spills over into Hong
Kong. Undeterred by holidays halting mainland trading,
people are finding ways to bet on Hong Kong shares.
International investors also are piling into
Hong Kong in anticipation of even bigger gains once more mainland money is allowed
to flow into the city’s markets.
Hong
Kong’s bubble
The
tactic is working. The Hang Seng Index not only rose
above 28,000 for the first time this week, but broke
records for trading volume and market value. William
Barbour, who helps oversee $32 billion at Deutsche Asset
Management in Sydney, is among those calling Hong Kong’s
rally a “bubble.”
What
else can one say when the market of a first-world
economy jumps 25 percent since August 20? The stock
price of Hong Kong Exchanges and Clearing Ltd., which
manages the city’s stock bourse, has climbed 167 percent
this year.
The
Standard newspaper captured the mood with the headline:
“Market Madness.”
The
“can’t-lose” attitude coursing across the Pearl River
Delta is courtesy of Ben Bernanke. Far from just calming
global markets, the Federal Reserve chairman’s
50-basis-point rate cut on September 18 made it safe
again for investors to bet on the most bubble-plagued
shares and companies they can find in Asia.
“The US
Federal Reserve’s interest rate cut was wrong,” Axel
Merk, head of Merk Investments Llc. in
Palo Alto,
California,
wrote in a note to clients. “Forget about the moral
hazard of whether the cut would plant the seeds for
further bubbles. Lowering interest rates is wrong
because it will do few any good, but cause harm to
many.”
Ben-carry trade
That’s a
longer-term view, but one many investors don’t seem to
be considering.
You know
something’s amiss when bad news is a sign to buy more
stocks. In more rational times, news that UBS AG,
Deutsche Bank AG and others are taking significant
writedowns amid global credit-market turmoil would be a
warning signal. The same is true of more troubles in the
US housing market. Instead, such disclosures are
considered bullish.
And why
not, when you have the “Bernanke Put” on which to rely?
It used to be the “Greenspan Put,” a reference to former
Fed Chairman Alan Greenspan’s weakness for bailing out
markets and investors when things get dicey.
Forget
the global credit crunch; Bernanke is ready to cut rates
again. US consumers drowning in debt? No problem.
Subprime fallout? The Fed is on it. What about the
dollar’s slide, unnerving all those investors who
borrowed cheaply in yen and invested the money overseas?
Ben will carry you. The yen-carry trade is being
replaced by the Ben-carry trade.
Irresponsible investors
Perhaps
the biggest hypocrisy is how the US is doing what it
chastised Asia for doing in 1997. The Fed is pumping
monetary largess into markets at a time when
irresponsible investors, lenders and rating companies
deserve to pay a price for their actions. Much of that
liquidity is heading to
Asia.
During
the Asian crisis, the White House told the region’s
leaders not to be afraid of a recession. It would
cleanse the region of past excesses and offer a fresh
start. And here you have the Fed reinflating asset
bubbles and ignoring inflation risks to avoid what’s
probably a necessary recession.
Recessions happen. A few quarters of contraction may be
needed to stop this dangerous cycle of rate cut after
rate cut shielding the US from the shakeout it so badly
needs. Also, it could help China avoid overheating and
trim its unsightly trade surplus, leaving its economy
better off in the long run.
It would
seem policymakers learned nothing from the events of
1998, when they rescued John Meriwether’s Long-Term
Capital Management. Since then, the Fed has bailed out
excessive risk- takers countless times, encouraging more
of the same behavior.
While
Asian markets have been along for the ride for sometime
now, things are accelerating thanks to the Fed. Why
should investors worry when they know Bernanke aims to
keep the merry-go-round turning? |
